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IU Northwest professors develop index to track region’s economy

Indices are capable of projecting local economic expansion or contraction six months in advance

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Professor of Finance Bala Arshanapalli, Ph.D.

Twenty years have passed, and the Northwest Indiana economy is seeing about the same level of economic activity as it did in 1992. And, there are no indications of a rapid turnaround in the next few months.

That information comes courtesy of an index created by two Indiana University Northwest professors from the School of Business and Economics: Professor of Finance Bala Arshanapalli, Ph.D., and Professor Emeritus of Economics Don Coffin, Ph.D.

“After a significant growth in the local economy of the 1990s, the region’s growth has been stagnant the last decade,” said Arshanapalli, who is the Gallagher-Mills Chair of Business at IU Northwest.

He and Coffin have spent the past year developing the Northwest Indiana Index, a research project that accurately gauges the dynamics of the region’s economy while at the same time estimating the probability of an upcoming change in local economic activity.

The index has two components: the Northwest Indiana Coincident Index, which provides a monthly snapshot of the region’s progress; and the Northwest Indiana Leading Index, which forecasts how the Coincident Index will change in the next six months.

“This data should be particularly interesting to public officials, as well as those in banking and real estate,” Coffin said. “Or, really anyone interested in trends in local economic development.”

Student Assistance

A Lilly Sustaining Grant Fellowship funded the research and provided Arshanapalli and Coffin with the assistance of Vicki Urbanik, a student in the business school’s post-baccalaureate certificate program in accounting.

Urbanik has assisted the team by researching the coincident and leading economic indicators that have been developed by other states and regions to collect comparable data.

“Most states, including Indiana, have developed indicators representative of their statewide economies,” Urbanik said. “But it’s far less common for regions, like Northwest Indiana, to have such an index.

“In my opinion, this project will help Northwest Indiana stand out as a leader in planning for a more prosperous economy. As a lifelong Northwest Indiana resident who is very hopeful about our region’s economic future, I was thrilled to be given a chance to participate in this work.”

The Past

The Northwest Indiana Index measures economic data from January 1992 onward. Arshanapalli and Coffin noted two important findings when reviewing data from the last 20 years. First, the region’s economy began slowing down in early 2000, much earlier than the nation’s economy. As a result, the region experienced a deeper and longer-lasting recession than the U.S. economy.

Additionally, the timing of the region’s last downturn was roughly similar to that of the nation’s downturn. Locally, that slowdown began in May 2008 and lasted through May 2009.

The Future

Future data mined from the Leading Index will serve as a timely and useful signal of shifts in business cycle phases and will help to predict impending expansion or contraction of the local economy.

Coffin explained that their key set of leading economic variables should produce a negative reading prior to the onset of a recession and vice-versa for any uptick in the economy.

“In general, three consecutive monthly drops in the Northwest Indiana Leading Index would signal an upcoming recession. Three straight increases would signal an expansion,” Coffin said.

Urbanik said she views any monthly drops as an opportunity, not a threat.

“The Northwest Indiana Index data shows some serious challenges,” Urbanik said. “But as I’ve learned both from being a student and from personal experiences, even seemingly insurmountable problems present an opportunity – the opportunity to tap into existing resources to find long-lasting solutions.

“The key for all of us who live, work and study in Northwest Indiana is to use our ingenuity and creativity to harness the incredible strengths in our region for our long-term sustainability.”

A Lilly Sustaining Grant Fellowship funded the research and provided Arshanapalli and Coffin with the assistance of Vicki Urbanik, a student in the business school’s post-baccalaureate certificate program in accounting.